Value Chain Marketing: Strategic Outsourcing Considerations

[Editor’s note: This installment is part of an ongoing series. You canstart at the beginningin order to follow its logical sequence.]

by Kenneth Rudich

When outsourcing is a viable alternative to doing everything in-house, it makes little sense for an enterprise to ignore it.

Strategic outsourcing allows for optimization in two significant ways:

1. It affords the flexibility to concentrate on those activities that matter most to the bottom line — to nurture, grow and refine them. This is consistent with the value chain concern for improving revenue-generating power.

2. By turning the “other work” over to someone who specializes in performing it, outsourcing provides relief from activities that are necessary for survival but fall into the category of being a pain point or distraction. What’s more, every facet of the business will then receive expert attention, which probably is something the enterprise couldn’t have done on its own without incurring the additional sting of appreciably higher value chain costs or the risk of becoming overextended. This is consistent with cost optimization.

There are two vantage points from which to think about outsourcing.

One is to be a provider of outsourced services so as to assist others with building or strengthening their value chain.

The other is to employ outsourcing as a means for completing or fortifying the internal value chain structure.

Core and Context Analysis

The key to getting the full benefit of outsourcing is to build it on the back of a measured strategy.

Technology strategist and business re-engineering consultant Geoffrey Moore encourages outsourcing as a means for keeping a business lean. He characterizes lean as trimming the fat, and he says that trimming the fat is a matter of focusing on the core.

Along these lines Moore has developed what he calls a “Core and Context Analysis.”

As the title suggests, it separates an organization’s activities into two categories.

Core Activities

Core activities are those that can set an organization apart in consumer appeal and competitive advantage.

Concentrating on continuous improvement in core activities will yield the greatest rewards at the enterprise level, says Moore.

Context Activities

Context activities, while critical to enterprise success, are those that do not by themselves provide a means for success.

They may be vital to the everyday life of an organization — to keep it up and running — but they don’t hold much promise for yielding advantages that will help it excel.

It’s undesirable to invest more energy than necessary into them, because it won’t assist with establishing or enhancing competitive advantage.

As such, these activities become good candidates for outsourcing.

The primary idea is to focus as much as possible on core activities, while delegating the context obligations to others.

What makes this strategy work so well is that matching the context activities with competent outsource providers converts a weakness into a strength because the outsourced activity is core to the provider.

Augmented Specialization

Another outsourcing consideration revolves around the sometime need to augment in-house specialization with outside specialization, either on a temporary basis or long term.

Unlike context outsourcing, which concentrates on expense-related relief, this outsourcing is focused on enhanced or supplemental revenue-generating power.

Such a circumstance can arise when in-house staff is already operating at capacity, or would benefit from a fresh outlook, or simply lack a one-off specialization need.

Long term partnerships or arrangements may develop when the outside provider fills a gap with products or services that are otherwise rare or too expensive to replicate in-house.

It may turn a weakness into a strength, empower the enterprise to broaden its scope of services, or smartly complement what a downstream consumer prefers or needs.